One of the things that keeps people from being successful Forex traders is their trading plans.
Sounds obvious, right? But how often do you come across a trader with an intricate, subtle, beautifully crafted trading plan – dynamic enough to cater for their psychology, and the ever-changing markets, yet simple enough to apply when they are actually trading?
Not often – and that is because traders fail to take the necessary first steps in writing down their rules, and then consequently fail to work on improving them.
Once you write down your trading plan’s rules, you have a base to work with, which will allow you to grow and expand your plan to capture any market insights you learn while implementing it.
Eventually, if you are emotionally flexible enough, your plan will be a work of trading “art”.
Simplified not simple
Your rules for your trading system need to allow for clear and decisive action.
This means that your actual rules for buying and selling should be quite clear and easy to use. But this does not mean your plan itself should be simple. Rather, you should take your insights from the market and simplify them into a plan of action.
An example of a simple plan would be to buy or sell if two moving averages cross on a daily chart with a 50 pip stop-loss and a 100 pip profit target, which is generally not going to provide you with a long-term edge.
In contrast, if you believed that the USD was going to strengthen in 2015 against the EUR due to macro-economic forces, and that the weekly market type was bear normal, then selling when the fast moving average crosses below the slow one on a daily chart could provide you with a big edge.
The actual entry rules are the same, but in the second example the entry is within the context of the bigger picture. It is simplified, not simple.
When you write down your rules everything changes
I know that is a big statement, but when you try it, you will see it’s not far from the truth.
Instead of hoping that the market is going to do what you want, or you wondering if you should just hold on a bit longer, you go and look at your rules and they will tell you what to do.
(If they don’t tell you what to do, or you don’t think they are good enough, it’s a sign that you need to add more rules to your plan, or change them. Just be careful of making reactive changes to your plan, as we tend to overvalue recent history too much in our decision making processes.)
This changes the dynamic of mistakes. Mistakes are now not about whether you win or lose on a trade. Rather, they are about whether you follow the rules of your plan. It establishes discipline in your trading, which is critical to your success.
Your plan is not working
What to do if you are not getting the results you want?
It is just a simple matter of making changes to your rules, to improve the results. Think of it like a science experiment in a controlled environment. You change a variable (i.e. one rule) at a time and then cumulatively they will all add up to give you that beautifully crafted plan you are after.
For example: you place 20 trades, exactly following your rules, and then make a change (such as adding a rule that your entries must have a fundamental catalyst, or you trade in the direction of the 200 period EMA) and then place 20 more trades following your rules, and so on until the plan is working well for you.
What rules to write down
Here are some of the rules you can write down for your system to get you started, though you might want to make changes based on your personality.
- Entry rules
- Setup conditions (such as fundamentals, trends or key levels)
- Stop-loss placement
- Profit taking rules (I believe in having multiple rules here to cater for different market conditions)
- Position sizing rules (how much you will trade, and how this helps to quantify your risks)
- Market type(s) that your system works in
You should be as specific as you possibly can be. For example, it’s better to say that you will enter long when the daily candle closes over the neckline on a double bottom, rather than say you will enter when you see a classical chart pattern.
Here is how to get access to an interactive free template you can use for this.
Stop if you need to
This is the last article in our “significant importance” series about quadrant 2 activities to conduct for your trading.
Without written rules, you really should consider not trading until you have written your rules down. It may be that you are already trading profitably with large amounts of capital, but in this case, written rules may help you achieve even better trading results.
Once you have written down your rules, then you can start testing at small position sizes.
You may also like to review the rest of the articles in the series if you have not done so already:
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (https://fxrenew.com/forex-course/). He is a co-owner of Forex Signal Provider www.fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free (https://fxrenew.com/newsletter-sign-up).